Reporting the debit interchange debate

By Felix Salmon

March 8, 2011

Edward Wyatt has a big piece in the NYT on the banks' last-ditch attempts to weaken the rules reducing debit-card fees -- attempts which might be working, especially given Barney Frank's long-standing opposition to the rule.
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Edward Wyatt has a big piece in the NYT on the banks’ last-ditch attempts to weaken the rules reducing debit-card fees — attempts which might be working, especially given Barney Frank’s long-standing opposition to the rule.

I’m not a fan, though, of the way that Wyatt presents the banks’ side of the argument without trying to work out whether it makes sense. For instance:

Banks contend the proposed cut in fees — to 12 cents per transaction from an average of 44 cents — will leave many of them unable to afford to issue debit cards to customers or will force them to raise other consumer banking charges to cover the costs. They also claim retailers will reap unfair profits.

This is ludicrous on its face: there’s no chance that banks will be “unable to afford to issue debit cards to customers”. In most cases, your debit card is your ATM card, are they really suggesting they can’t afford to give out ATM cards?

As for the costs of debit cards, they’re largely the banks’ own fault, for constantly exhorting people to use the insane abomination that is signature debit, and even implying that signature debit is safer than using a PIN. If you tell your customers to use an unsafe method of payment, it’s a bit rich to then turn around and complain of high fraud costs.

It seems to me that Wyatt should have stopped and asked what the people he was quoting were talking about:

“I am appalled that our members will shoulder tremendous financial burden and still be on the hook for fraud loss while large retailers receive a giant windfall at the hands of the government,” John P. Buckley Jr., the president of Gerber Federal Credit Union of Fremont, Mich., told a House of Representatives subcommittee last week.

In what possible sense will credit union members “shoulder tremendous financial burden” if this rule is enacted? I’m having difficulty thinking of one. The cost they pay for goods bought — the amount of money that leaves their account — will be unchanged. The only question is how much of that money goes to the merchant, and how much gets kicked back to the credit union. Technically, it’s true, credit unions are owned by their members. But I’m not seeing any tremendous financial burden here.

And that’s not the only part of the story which doesn’t make sense:

Lawmakers tried to soften the blow by exempting smaller banks from the fee cap. But now even those institutions with less than $10 billion in assets oppose the law. They say that if they continue to levy the current, higher fees, their debit cards will not be able to compete against the big banks, which will charge lower fees because they have no choice.

This just stumps me: I’m open to any conceivable interpretation, if you want to help out here. Compete on what front? For customers? Why on earth would consumers care how much the debit interchange fee is? A lower interchange fee doesn’t save them any money. For merchants? No: the cards are all going to be either Visa or Mastercard, and merchants have to accept them. They can’t accept low-fee cards and reject high-fee cards.

In general, it seems to me, banks compete on how high their debit interchange fees are, not how low. The higher the fee, the more perks they can kick back to their depositors, in the form of reward points or cash back or the like. I simply can’t for the life of me work out how banks with high debit interchange fees “will not be able to compete against” big banks with low fees.

And Wyatt’s article as a whole is greatly tilted towards the bank lobby. By my count, he gives the banks’ side of the story eight different times, by quoting bankers directly or just recounting what “banks contend”. By contrast, the merchants get cited only twice, and their argument doesn’t really get parsed at all. And Wyatt makes no attempt at all to reach any consumer representatives to see what might be best for us.

Debit interchange is a complicated subject: it should be treated analytically, instead of as a political horse-race issue where lobbyists get to say anything they like without being fact-checked. I hope that the Fed’s rule stays in place. But if the banking lobby wins this one, stories like this will be part of the reason why.